Go heavy on medium-term funds

Retail investors in debt would do well to stick with medium-term funds, which have a tenure of around two years, for some more time.

Mahendra Jajoo, head-fixed income, Pramerica Asset Management, says: “The focus of investors should now be heavily in favour of medium-term funds.” He recommends a major portion, almost 75 per cent allocation, to these schemes.

Short-term funds had lost their flavour after Raghuram Rajan’s dovish stance in the policy statement issued in the first week of June.

The subsequent rally in bond prices saw experts advising that the season of long-term debt funds was back.

But it didn’t last long.

In less than three weeks, a number of global and local changes might have put paid to hopes that interest rates would be coming down soon, leading to another rally in bond prices.

The reason is that inflation continues to be a threat. With the Modi government raising rail freight rates by 6.5 per cent, there will some inflationary pressure on the price of goods and commodities being transferred through this route.

In addition, there has been a direct increase of 14.2 per cent in railway fares.

Then, the fear of disruption in oil supplies due to the civil war-like situation in Iraq has seen prices of crude oil (Brent crude) rise by five per cent to $113.75 a barrel.

In addition, the absence of

adequate rainfall will also impact prices of vegetables.

In other words, household budgets will continue to bear the brunt of higher prices.

According to Jajoo, the biggest fear among these is the monsoon factor.

“While the Iraq trouble can still be discounted partially, the monsoon is fast becoming a worry event.”

The case for medium-term and long-term funds hasn’t been strong till recently because of the dismal performance in the past year.

The category average returns of medium-term and long-term debt funds have been only 2.81 per cent in the past year. However, in the past six months, this has improved to 6.70 per cent.

Says Hemant Rustagi: “Investors should ideally look at both short-term and medium-term funds because there is a risk of inflation.”

He also recommends corporate bond funds that invest in good papers of companies.

A couple in this category are Templeton India Corporate Bond Opportunities Fund and HDFC Corporate Debt Opportunities Fund, provided your horizon is at least two years.

While there is uncertainty, Jajoo feels these are short-term problems that will get resolved over time.

“With a strong government at the Centre, we feel investors should not worry too much. Much like equities, when it is recommended that investors should enter when there is uncertainty in the stock market, we feel that those who missed the 8.5 per cent (bond yield) phase can enter now when yields are around 8.8 per cent.”